FIN 2117 48534261.

docx Prepared By: NK Woo

Lecturer & Tutor

Lecture No. 1
Introduction to Securities Markets / Financial Markets

Structure of Financial Systems

1. What are Financial Markets?

The main components of Financial Markets include:
a) Stock Markets;
b) Bond Markets;
c) Foreign Exchange Market; and
d) Derivatives Markets.
Financial Markets are markets where securities (Stocks / Shares and Bonds), are issued and
traded (i.e. bought and sold). Stock Markets are also called Equity Markets, since the
stockholders (who own common stocks) are the owners of the Corporation.
A Primary Market is a market where a Corporation issues / sells its new securities to the
public for the first time (i.e. an Initial Public Offering).
A Secondary Market is a market where the issued securities are traded among investors.
Funds are channeled / moved from (Savers/Lenders), people who have excess available
funds (but lack investment opportunities) to people / corporations (investors/ borrowers)
who have investment opportunities but lacked funds.

2. What are Securities?

Securities (Stocks / Shares and Bonds), also called Financial Instruments are financial
claims in the issuers’ future income or assets. For the individual of firm that sells them
(borrowers or issuer of the Financial claim in return for money), they represent financial
liabilities. For the buyer (lender or investor in the financial claim), they represent financial
assets.

Page 1 of 5
FIN 2117 48534261.docx Prepared By: NK Woo
Lecturer & Tutor

3. Who issues securities (Stocks / Shares and Bonds)?

Corporations issue Stocks (Shares) and Bonds (Debt Instruments) to raise funds to finance
their business activities. Governments also borrow / raise funds to finance government
expenditure, by issuing long-term Notes and Bonds.
Federal governments issue long-term notes and Bonds to fund the national debt, while the
Local governments also issue long-term notes and Bonds to finance capital projects.
Corporations issue both Bonds and stocks.

4. What is a Financial Intermediary? Describe the role of Financial Intermediaries

Financial Intermediaries are economic agents who specializes in buying and selling (at
the same time) Financial Contracts (Loans and Deposits) and Securities (Stocks and Bond).
Banks are the largest financial institution in many economies. They accept deposits and
make loans (i.e. lend to individuals and Corporations). Other examples of Financial
Intermediaries are Mutual Funds, Pension Funds, Insurance Companies, and Investment
Banks.

5. Types of assets:
Distinguish between Financial Assets and Real Assets by providing examples of each type
of assets:
Examples of Real assets:
a. Tangible assets
b. Houses, equipment, inventory
Examples of Financial assets:
c. Securities (e.g. shares, debentures, bills, notes)
d. Claims for future payments
e. Owners anticipate earning a future rate of return

Page 2 of 5
FIN 2117 48534261.docx Prepared By: NK Woo
Lecturer & Tutor

Functions of Financial Systems

6. What is the difference between Direct Finance and Indirect Finance?

In Direct Finance, borrowers-investors borrow funds directly from lenders in the Financial
Markets by selling them securities.

In Indirect Finance, a Financial Intermediary stands between the lender-savers and the
borrowers-investors. The Financial Intermediary helps to transfer funds from the lender-
savers to the borrowers-investors.
This shows the financial Markets and Financial Intermediaries are alternatives which
perform the same functions (i.e. channeling the funds from the lender-savers to the
borrowers-investors), but in different ways.

7. The main functions of Financial Systems are:

 Provide the mechanisms by which funds are transferred units that have surplus fund
to those unit in shortage of funds, thus facilitating lending and borrowing;
 Enable wealth holders to adjust the composition of their portfolios (various types of
investments / assets); and
 Provide Payment Mechanisms (such as Checks, Credit Cards, Electronic Fund
Transfers, which allows individuals and Corporations to send and receive payments
quickly and safely over long distances).

8. Difference between Money Market and Capital Market

The Money Market refers to all institutions and procedures that provide for transactions
in short-term debt instruments, generally issued by borrowers with very high credit
ratings. (by financial convention, short-term means maturity of one year or less).

The Capital Market refers to all institutions and procedures that provide for transactions
in long-term financial instruments (maturity period that extends beyond one year).

Page 3 of 5
FIN 2117 48534261.docx Prepared By: NK Woo
Lecturer & Tutor

9. Foreign Exchange Market

A Foreign Exchange Market provides a mechanism for the transfer of purchasing power
from one currency to another by facilitating the exchange of currencies. This Market is
not a physical entity but is an international network of Foreign Exchange dealers and
customers who transact with each other via electronic connections such as Telephone,
Fax, Telex, Email and financial data display screens.

Most countries license Foreign Exchange Dealers to trade (buy and sell) Foreign
currencies. Licensed dealers are usually banks and other financial organizations.

10. Derivatives Markets and Risk Management

The two major Derivatives Markets are the Futures Market and Options Market. Other
derivatives / financial instruments are Swaps, and Derivatives based on Commodities.

Derivatives are financial instruments that are derived from, or based on, the value of an
underlying asset. Derivatives may be traded through an organised exchange or over-the-
counter (OTC)

Derivative instruments such as futures contracts are useful for risk management by
investors and borrowers. They can also be used by speculators who seek profit through
speculating on price movements.
A financial manager can manage risk from a Corporation’s interest-bearing borrowings
or investments, from foreign currency transactions and also from risks associated from
fluctuations in the price of the key commodities which his corporation deals.

Page 4 of 5
FIN 2117 48534261.docx Prepared By: NK Woo
Lecturer & Tutor

11. Components of Australian Financial Markets

 Public offerings and Private Placements
 Primary and Secondary Markets
 Money and Capital Markets
 Foreign-exchange markets
 Derivatives markets
12. Primary markets
 Selling of new securities
 Funds raised by governments and businesses
13. Secondary markets
 Reselling of existing securities
 Adds marketability and liquidity to primary markets
 Reduces risk on primary issues
 Funds raised by existing security holders

 Futures markets
A futures contract is a legally binding agreement to buy or sell the underlying financial
instrument or commodity
 Specific quantity
 Specific quality
 Deliverable at an agreed location
 Deliverable at an agreed future time
 At an agreed price

In July 2006, the Australian Stock Exchange (ASX) and Sydney futures Exchange
(SFE) merged , creating the present Australian Securities Exchange.

Page 5 of 5